Does the End Justify The Green?

May 12, 2008
Manufacturers look to identify quicker, more tangible return on sustainability investments.

On the surface, the driving force behind "going green" is to help sustain the environment for future generations. While that motivation is certainly great PR for manufacturers, those pursuing green initiatives clearly have other benefits in mind too, namely spending less on energy, fuel and reducing the cost of materials used in production.

Still, there seems to be a great deal of uncertainty in the manufacturing industry as to the actual costs of going green. Some contend that green products and materials can be comparable in price, while others concede that they're more expensive and urge companies to focus on the long-term cost savings instead.

In either case, overhauling a plant's equipment, its energy sources, or working to green their supplier base can be costly, time consuming and threaten to disrupt a process that might have worked well for years. That means there needs to be a good reason for your company to cough up the "green" to get these projects done. John Davies, vice president of analyst firm AMR Research's sustainability forum, says that done right, a company's return on its green investment can go far beyond improving its public image.

"Manufacturers tend to think that green initiatives are something that is done out of altruism. In fact, a lot of times these programs are great revenue generators and cost-cutters," says Davies. "Even so, cost is still the driving criteria and will trump any sort of environmental component. There is no cost of carbon, and in itself there is no advantage in reducing carbon aside from making a statement. So if you can't make an economic case, it's hard to get something approved."

Not surprisingly, then, to get funding a green initiative needs to show it can generate a return just like any other capital expenditure. In the case of sustainability, the challenge lies in the fact that these initiatives are often billed as having "long-term" benefits and a tangible ROI might not be seen right away. In response, companies have started to figure out ways to make their green efforts more cost feasible.

According to Davies, one manufacturer's plan has involved putting together a capital funding process that takes into account the future cost of carbon. The company sets aside funding for projects that look like they could provide a good rate of return, but might just miss the internal rate.

"What happens then is they apply to a committee that's been established to oversee CO2 capital funding, and submit it for approval," Davies explains. "If the project provides a meaningful reduction, then they cost that at a certain dollar amount per metric ton to be considered in the approval process."

Another approach involves mitigating the costs of alternative energy sources by participating in a power purchase agreement. Companies use these agreements to spread the cost of installing solar energy panels across multiyear contracts, in which electricity is purchased from providers such as GE Capital, Citibank or Goldman Sachs. That way rather than paying for the system's installation, maintenance and upkeep, those companies can pay a fixed charge per kilowatt hour for the duration of the contract.

Of course, efforts like these still need to be met with approval from upper management before getting off the ground. The key to that is having committed leadership and management that want these projects to succeed. Once that is achieved and everyone begins to look at the operation with green or sustainability in mind, it becomes easier to find projects that will pay off.

"By making it clear to everyone in the company that sustainability is a critical part of the core value of the company, employees are given the freedom to be creative and look at alternatives that they might not have before," Davies says. "That's the differentiator now -- whether the leadership is constantly asking you to look again and find ways to reduce emissions."

See Also

Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!